The Fed will cut interest rates after the election. what it means to you

The US Federal Reserve announced on Thursday that it would cut its benchmark interest rate by a quarter of a percentage point (25 basis points), less than two days after President-elect Donald Trump wins the 2024 election. did.

Economic anxiety was rife ahead of Election Day, with many Americans struggling to make ends meet due to a long period of high inflation.

But recent economic data shows that inflation is retreating toward the Fed’s 2% target, paving the way for the Fed to cut interest rates this fall. Thursday’s reduction is the second after a half-point reduction on September 18th.

The federal funds rate sets banks’ overnight borrowing costs, but it also affects consumers’ borrowing costs.

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Since the central bank’s last meeting, the Fed’s preferred inflation measure, the Personal Consumption Expenditure Price Index, rose just 2.1% from a year earlier.

President Trump has been lobbying the Fed to lower interest rates, even though the central bank operates independently of the White House.

While this is good news for consumers who are struggling under the weight of high borrowing costs following 11 consecutive rate hikes between March 2022 and July 2023, lower interest rates will have a noticeable impact on household finances. It may take some time before it is given.

“The Fed raised interest rates from the ground floor of a skyscraper to the 53rd floor, and now they’re at the 47th floor and will reach the 45th floor with further rate cuts. Our view hasn’t changed much,” he said. Ta. Greg McBride, chief financial analyst at Bankrate.com, said:

From credit card and mortgage rates to car loans and savings accounts, take a look at how the Fed’s interest rate cuts will start to impact household finances in the coming months.

Most credit cards have variable interest rates, so they are directly tied to the Fed’s benchmark. The central bank’s rate hike cycle has pushed average interest rates on credit cards up from 16.34% in March 2022 to more than 20% now, near record highs.

The annual rate has already started to fall due to the Fed’s first rate cut, but not by much.

“Still, this is a very high interest rate,” said Matt Schultz, credit analyst at LendingTree. “While the decline will almost certainly continue in the coming months, no one should expect their credit card bills to drop dramatically right away.”

The best bet for people with credit card debt is to shop around for a better rate or ask their issuer to reduce the rate on their current card, rather than waiting for the APR to adjust slightly in the coming months. Either ask for it or get a 0% balance transfer offer. he said.

“An additional rate cut doesn’t change the fact that the best thing people can do to get rates down is to take matters into their own hands,” he said.

During his campaign, Mr. Trump proposed capping credit card interest rates at 10%, but such a measure would also have to pass Congress and survive challenges from the banking industry.

Even though auto loans are fixed, rising vehicle prices and high borrowing costs are making them “increasingly difficult to manage,” said Jessica Caldwell, head of insights at Edmunds. .

“During this economic strain, it’s clear that President Trump’s promise of fiscal relief resonated with voters across the country,” she said.

The average interest rate on a five-year new car loan is now about 7%, up from 4% when the Fed started raising rates, Edmunds said. However, the Fed’s rate cuts, in part due to increased competition among financial institutions and increased market incentives, will likely cushion some of the rise in car financing costs (rates will likely fall below 7%).

“Americans are looking for relief from the relentless pressure on their wallets, and even a modest federal rate cut would be seen as a positive step in the right direction,” Caldwell said.

President Trump supports making interest paid on auto loans fully tax deductible, which would also need to pass through Congress.

Since the pandemic, housing affordability has become a major issue, due in part to a sharp rise in mortgage rates.

President Trump has said he will lower mortgage rates even though 15- and 30-year mortgage rates are fixed and tied to Treasury yields and the economy. Trump’s victory spurred a rise in the yield on the 10-year U.S. Treasury, which in turn caused mortgage interest rates to rise.

However, the Fed’s lower target interest rate could put some downward pressure on the economy.

“If interest rates continue to decline, persistently high mortgage rates could start to fall,” said Michele Ranelli, vice president of U.S. research and consulting at TransUnion. As of the week ending Nov. 1, the average interest rate on a 30-year fixed-rate mortgage was 6.81%, according to the Mortgage Bankers Association.

Jacob Channell, senior economist at LendingTree, said mortgage rates are unlikely to fall significantly given the current climate.

“As long as investors continue to worry about what the future holds, Treasury yields, and by extension mortgage rates, will continue to fall and struggle to maintain their level,” Channel said.

Student loan borrowers will see less relief from interest rate cuts. Federal student loan interest rates are fixed, so most borrowers will not be immediately affected. With Trump’s victory, efforts to forgive student loans will likely be off the table.

However, if you have private loans, those loans may have fixed interest rates or variable interest rates tied to Treasury bills or other interest rates. When the Fed lowers interest rates, interest rates on these private student loans will be lowered over one to three months, depending on the criteria, said Mark Kantrowitz, a higher education expert.

Still, a quarter-point reduction would only reduce monthly payments on variable-rate loans by “about $1 to $1.25 per month for every $10,000 of debt,” Kantrowitz said.

Eventually, he said, borrowers with existing variable-rate private student loans may be able to refinance into cheaper fixed-rate loans. However, refinancing federal loans with private student loans eliminates the safety nets that come with federal loans, such as deferment, forbearance, income-based repayment, and loan forgiveness and forgiveness options.

Plus, if you extend the term of your loan, you’ll end up paying more interest on your balance.

Central banks do not directly influence deposit rates, but yields tend to correlate with changes in the target federal funds rate.

As a result of the Fed’s rate hikes, interest rates on high-yield online savings accounts have fluctuated significantly and are still paying more than 5% (the most savers have been able to earn in nearly 20 years), with the rate increasing by 2022. This is an increase from about 1% of the previous year. to bank rate.

“Certainly, interest income on savings accounts, money markets, and certificates of deposit will decline, but the most competitive yields will still easily outpace inflation,” McBride said.

Bankrate says interest rates on one-year CDs currently average 1.76%, but the highest-yielding CDs are more than 4.5%, about the same as high-yield savings accounts.

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